Professional Home Health Care, Inc. v. Complete Home Health Care, Inc.

F I L E D
United States Court of Appeals
Tenth Circuit
UNITED STATES COURT OF APPEALS
December 19, 2005
TENTH CIRCUIT
Clerk of Court
In re: PROFESSIONAL HOME
HEALTH CARE, INC., a Colorado
corporation,
No. 04-1425
Debtor, (D.C. No. 03-AP-2452)
(D. Colo.)
-------------------------
PROFESSIONAL HOME HEALTH
CARE, INC., a Colorado corporation,
Appellant,
vs.
COMPLETE HOME HEALTH CARE,
INC.; JUDY RUZICKA; BARBARA
CICCONE; DIERDRA DAUGHERTY;
HOLLY DAVIS,
Appellees.
ORDER AND JUDGMENT *
Before TACHA, Chief Judge, ANDERSON, and KELLY, Circuit Judges.
Plaintiff-Appellant Professional Home Health Care (“PHHC”) appeals from
*
This order and judgment is not binding precedent, except under the
doctrines of law of the case, res judicata, and collateral estoppel. This court
generally disfavors the citation of orders and judgments; nevertheless, an order
and judgment may be cited under the terms and conditions of 10th Cir. R. 36.3.
the district court’s order affirming a bankruptcy court’s judgment in an adversary
proceeding. Following a twelve day trial, the bankruptcy court entered judgment
in favor of Defendants-Appellees, Complete Home Health Care (“CHHC”), and
Judith Ruzicka, Barbara Ciccone, Dierdra Daugherty, and Holly Davis
(collectively “individual Defendants”). In its complaint, PHHC claimed that the
individual Defendants (1) breached their duty of loyalty, and (2) violated an
employee Work Agreement when they resigned from PHHC and established a
competing home health care company, Defendant CHHC. After hearing the
evidence, the bankruptcy court rejected PHHC’s claims. On appeal, PHHC argues
that the bankruptcy court erred as a matter of law in rejecting its claims. Our
jurisdiction arises under 28 U.S.C. § 1291, and we affirm.
Background
PHHC, a home health care provider, operated from six largely autonomous
branch offices throughout Colorado. Aplt. Br. at 8. Individual Defendants
Daugherty, Ciccone, and Ruzicka 1 were managers of distinct branch offices, with
duties including: (1) hiring and firing of personnel, (2) negotiating with vendors,
and (3) developing a network of agencies who referred patients to PHHC. Id. at
8-9. Defendant Davis was in charge of PHHC’s financial operations and
1
Defendant Ruzicka was also the Executive Director of PHHC.
-2-
supervised the staff who maintained the books and records of the company. Id. at
9.
On March 1, 2001, PHHC filed a chapter 11 petition in bankruptcy. On
March 27, 2001, PHHC filed its complaint against the Defendants, instituting this
proceeding in the bankruptcy court. According to PHHC, its longstanding,
profitable, and highly regarded home health care business was destroyed by a
conspiracy among the individual Defendants.
First, PHHC claims that the individual Defendants violated their duty of
loyalty by resigning en masse and without notice to PHHC. Apparently, the
individual Defendants resigned on the same day and at the same time by faxing
six identical two-sentence letters of resignation. Aplt. Br. at 2. Further, PHHC
explains that this “coordinated abandonment” resulted in the “devastating
financial and administrative consequences one would expect” following the
resignations of PHHC’s branch managers. Id.Second, PHHC claims that the individual Defendants breached their Work
Agreements by establishing CHHC, a competing company, within three days of
resignation. PHHC explains that shortly after establishing CHHC, the Defendants
were employing most of PHHC’s former staff and that CHHC was serving
hundreds of PHHC’s former patients. Aplt. Br. at 3-4. Particularly, PHHC claims
that the Defendants violated their employment contracts by soliciting each other
-3-
as co-workers and by “recruiting” PHHC’s patients. Id.Discussion
When a federal court sits in diversity, it is required to apply the most recent
applicable substantive state law where pronounced by the state’s highest court.
Mincin v. Vail Holdings, Inc., 308 F.3d 1105, 1108 (10th Cir. 2002). In this case
we are required to apply Colorado law. When reviewing challenges to bankruptcy
court decisions, we utilize the same standard of review as the district court. In re
Hodes, 402 F.3d 1005, 1008 (10th Cir. 2005). We evaluate issues of state law de
novo, without deference. Salve Regina College v. Russell, 499 U.S. 225, 238-39
(1991); Roberts v. Printup, 422 F.3d 1211, 1215 (10th Cir. 2005). Therefore, we
review a bankruptcy court’s conclusions of law de novo, and that court’s findings
of fact are subject to a clearly erroneous standard. In re Hodes, 402 F.3d at 1008.
A. Breach of Loyalty
PHHC first claims that the individual Defendants breached their duty of
loyalty by “recruiting” each other to leave the company and thereafter forming
Defendant CHHC as a direct competitor. The individual Defendants, on the other
hand, argue that they were protected by a legal privilege to prepare and make
arrangements to depart while still employed by PHHC.
Under Colorado law, an employee breaches her duty of loyalty if she
-4-
solicits other employees to terminate their employment. Jet Courier Service, Inc.
v. Mulei, 771 P.2d 486, 497 (Colo. 1989). In Jet Courier, the Colorado Supreme
Court adopted the Restatement (Second) of Agency’s test for determining when a
breach of loyalty arises. See id.; see also Restatement (Second) Agency § 393.
As such, courts should focus on the following factors in determining whether an
employee’s actions rise to the level of a breach of loyalty: (1) the nature of the
employment relationship; (2) the impact or potential impact of the employee’s
actions on the employer’s operations; and (3) the extent of any benefits promised
or inducements made to co-workers to obtain their services in the competing
business. Jet Courier, 771 P.2d at 497. No single factor is outcome
determinative. Id. In applying the test, courts must analyze the “nature of an
employee’s preparations to compete to determine if they amount to impermissible
solicitation.” Id. The solicitation’s effectiveness is irrelevant. Id.
Employees do enjoy a privilege which enables them to prepare or make
arrangements to compete prior to leaving the employ of their future competitors.
See id. at 493, 497 n.13 (quoting Restatement (Second) Agency § 393, cmt. e).
The nature of such preparations is crucial in determining whether a breach of
loyalty has occurred. Id. at 497; see also Koontz v. Rosener, 787 P.2d 192, 195-
96 (Colo. Ct. App. 1989). In fact, the Colorado Supreme Court has held that this
approach should be applied flexibly, because certain traditional actions taken by
-5-
departing employees (e.g., an executive leaving with a secretary, a mechanic
leaving with an apprentice, a firm partner leaving with associates) are not
considered sufficient to constitute a breach of the duty of loyalty, absent an intent
to injure the employer. Jet Courier, 771 P.2d at 497 n.13. A breach of the duty of
loyalty requires more – and would only occur where the nature and extent of any
solicitations compel such a conclusion. Id.
The Restatement provides that “a court may find that it is a breach of duty
for a number of the key officers or employees to agree to leave their employment
simultaneously and without giving the employer an opportunity to hire and train
replacements.” Restatement (Second) Agency § 393, cmt. e. A court must
balance these factors, and the two competing public policies undergirding them, 2
in order to determine whether a breach of loyalty lies against the former
employee.
According to PHHC, the bankruptcy court erred in finding that the
individual Defendants breached their duties of loyalty in three ways: (1) the
bankruptcy court did not understand that PHHC was claiming that individual
Defendants solicited each other improperly; (2) the bankruptcy court did not
understand that the effect of the en masse resignation severely damaged its
2
The Jet Courier court noted the conflicting policies of requiring honesty
and fair dealing between employee and employer, as well as that of promoting
free and vigorous competition. Jet Courier, 771 P.2d at 493.
-6-
economic viability, and therefore, constituted a paradigmatic instance of breach of
loyalty; and (3) the bankruptcy court took into account irrelevant facts in arriving
at its decision. Aplt. Br. at 16-27. We address each argument in turn.
With regard to the first argument, PHHC is simply wrong that the
bankruptcy court erred by failing to take into account its claim that the individual
Defendants breached their duties of loyalty by soliciting each other. In reality,
after considering the evidence, the court found that the individual Defendants did
not improperly solicit each other because they were protected by the legal
privilege entitling them to make career preparations after departure from PHHC.
Further, the bankruptcy court found no evidence whatsoever that any other PHHC
employees were offered anything by the Defendants as an inducement.
With regard to the second argument, the bankruptcy court directly
addressed the en masse nature of this resignation, and found that the individual
Defendants were at-will employees, who were not motivated by any ill-will
towards PHHC, and who believed that their “tasks could be assumed by
subordinates who were positioned to take over.” Aplt. App. at 69.
This finding is amply supported by the record. In an official written
response to a governmental agency’s set of sanctions, Ms. Bellinger (PHHC’s
principal) stated that, except for two employees, “all of the staff who resigned . . .
were replaced within two or three weeks.” See Aplt. Supp. App. at 1591.
-7-
PHHC’s internal documents suggested that those directly below the departed
managers assumed their responsibilities and performed excellently. Id. at 1590-
91. Lastly, according to a former PHHC employee who testified at trial, Ms.
Bellinger herself called the individual Defendants’ resignations a “gift” to PHHC
– as the corporation had been contemplating discharging some employees for
financial reasons. Aplt. Supp. App. at 3683. The bankruptcy court was not
required to adopt PHHC’s contrary view of the facts.
Third, PHHC argues that the bankruptcy court took into account “irrelevant
facts” in arriving at its conclusion that the duty of loyalty had not been breached.
For example, PHHC faults the bankruptcy court for considering the reasons
advanced by the individual Defendants for resigning including PHHC’s financial
condition and regulatory problems. In this same vein, PHHC also argues that (1)
the motives of the Defendants were irrelevant, (2) the Defendants’ beliefs that
other PHHC employees would take over their resigned duties were irrelevant, and
(3) the en masse nature of the resignation was not justified based on the fact that
the Defendants were at-will employees.
We think that the bankruptcy court could consider these matters under Jet
Courier’s flexible approach, and we do not read the bankruptcy court’s decision
as holding that a breach of the duty of loyalty requires a finding that the departing
employees acted with a bad motive. Rather, the bankruptcy court heard the
-8-
evidence and obviously credited the individual Defendants’ view of the situation.
The bankruptcy court recognized that PHHC had a strong case before its
principal, Ms. Bellinger, was cross-examined and the individual Defendants
explained their actions and PHHC’s operations. After that, however, the
bankruptcy court chose to believe the explanation advanced by the individual
Defendants and apply the Jet Courier factors. This is a perfectly permissible
exercise of the fact-finding function. The district court’s legal conclusions flow
from its factual findings.
B. Violation of Work Agreement
PHHC argues that the individual Defendants breached their Work
Agreements by recruiting patients to the new company, CHHC. In addition,
PHHC disputes the bankruptcy court’s conclusion that the provision of the Work
Agreement allegedly breached by the individual Defendants was ambiguous.
Aplt. Br. at 27-32. According to PHHC, the bankruptcy court incorrectly
accepted parol evidence to aid in the determination of the contractual provision’s
meaning. Id. The individual Defendants, on the other hand, argue that the
contractual language restricts employees during employment and for 180 days
thereafter from only a single pattern of conduct – soliciting a PHHC client into
leaving PHHC and then going to work privately for the client.
The interpretation of a contract under Colorado law is a legal question.
-9-
Grant v. Pharmacia & Upjohn Co., 314 F.3d 488, 491 (10th Cir. 2002); Fibreglas
Fabricators, Inc. v. Kylberg, 799 P.2d 371, 374 (Colo. 1990). Whether a
contractual term is ambiguous is also a question of law. Grant, 314 F.3d at 491;
Pepcol Mfg. Co. v. Denver Union Corp., 687 P.2d 1310, 1314 (Colo. 1984). If a
contract is ambiguous, thus allowing the introduction of external evidence to
determine the contract’s meaning, “then interpretation of the contract becomes a
question of fact.” Stegall v. Little Johnson Assocs., Ltd., 996 F.2d 1043, 1048
(10th Cir. 1993).
The individual Defendants signed an employment agreement while working
for PHHC. This agreement contained a limitation on the scope of work they
could undertake both while employed and for 180 days following separation from
PHHC. The Work Agreement provides, in pertinent part:
In consideration for [PHHC’s investment in me as an employee] I agree
during my employment, and during the 180-day period of time after my
employment ends with [PHHC]
• to not recruit clients to leave this agency, and
• to not work privately for the agency’s clients.
Aplt. App. at 254.
According to the bankruptcy court, regardless of whether the meaning of
the provision was interpreted according to PHHC’s view (i.e., that any solicitation
of PHHC clients was restricted for 180 days after termination of employment), or
according to the individual Defendants’ view (i.e., that it restricted client
- 10 -
solicitation only in connection with private pay work while still employed by
PHHC), PHHC failed to provide direct evidence of a breach of the contract by the
Defendants. Aplt. App. at 71-72. We agree.
PHHC argues that the bankruptcy and district courts adopted a meaning of
“recruit” that was overly narrow. Aplt. Br. at 32-36. According to PHHC,
recruitment can be either direct or indirect. PHHC cites numerous cases for this
proposition, although rather peculiarly, none apply Colorado law. Aplt. Br. at 34
n.12. The individual Defendants, meanwhile, argue that under Colorado law,
recruit implies “actively initiated contact.” Atmel Corp. v. Vitesse
Semiconductor Corp., 30 P.3d 789, 793 (Colo. App. 2001). The dictionary
definition of “recruit” means “to secure the services of . . . [or to] enlist new
members.” Webster’s Collegiate Dictionary 985 (9th ed. 1991). As such, the
construction of “recruit” most likely correct under Colorado law requires a direct
request or plea. Atmel, 30 P.3d at 793.
Regardless of whether “recruiting” can be indirect as well as direct, though,
PHHC simply did not provide evidence that the individual Defendants violated
the Work Agreement by recruiting PHHC’s patients to CHHC. PHHC argues that
it presented “direct evidence that defendants had recruited at least 47 specifically-
identified patients among the hundreds of PHHC patients who transferred their
- 11 -
care to CHHC.” 3 Aplt Br. at 33. PHHC argues that due to the nature of the
relationship between the individual care provider and the patient, the recruitment
of PHHC individual health providers resulted in the indirect recruitment of
PHHC’s patients, because if the provider left PHHC to go to CHHC, so would the
patient. Aplt. Br. at 35. In essence, PHHC argues that it defies logic to claim
that the spontaneous migration of so many PHHC clients to CHHC could occur
absent recruitment. Unfortunately for PHHC, this logic cuts both ways.
First, PHHC had serious financial and regulatory difficulties, some of
which precipitated the individual Defendants’ very departure. Second, in the time
following the individual Defendants’ resignations, PHHC was struggling to retain
patients and employees. As PHHC has argued, the relationship between the
individual care provider and the patient is much stronger than that between the
3
While PHHC contends the bankruptcy court ignored this “evidence,” our
independent review of those citations identified by PHHC as providing “direct
evidence” of CHHC’s recruitment of PHHC patients has not revealed anything
more than the names of patients who transferred from PHHC to CHHC and the
fact that those patients had nurses at PHHC who transferred to CHHC. See Aplt.
App. 797-865. PHHC does not point to testimony indicating that former PHHC
employees recruited those patients to come to CHHC. Indeed, all three of the
former employees – two nurses and one personal care coordinator – that PHHC
relies upon to support its theory actually testified to the contrary. Aplt. Supp.
App. at 3693, 4301, 4360-61. Further, PHHC’s characterization of this situation,
viz., that these nurses worked only for PHHC and then began working solely for
CHHC, completely misstates the record. Both nurses explicitly testified that they
were working for multiple agencies the entire time, which makes sense when we
realize that they were temporary employees. Aplt. Supp. App. at 4295, 4355-56.
- 12 -
home health care provider and the patient. As such, it makes perfect sense why
the patients departed with their individual care providers, some to CHHC and
some elsewhere. Indeed, as the bankruptcy court noted, the fact that PHHC is
unable to come forward with any direct evidence contradicting the individual
Defendants’ testimony that they did not solicit PHHC’s patients fully supports its
finding that PHHC failed to prove any recruitment – direct or indirect. As such,
PHHC’s argument to the contrary is without merit. 4
AFFIRMED.
Entered for the Court
Paul J. Kelly, Jr.
Circuit Judge
4
Therefore, the questions of (1) whether the contractual provision is
ambiguous or not, (2) whether the contractual provision proscribes direct and/or
indirect recruitment, or (3) how, absent recruitment, so many former PHHC
patients ended up at CHHC, need not be addressed because the lack of any
evidence that the individual Defendants recruited any of PHHC’s employees or
patients leads to the conclusion that there was no breach of the Work Agreement.
- 13 -